The following anecdote may seem like an odd way to describe what you may face in international transactions in Mexico real estate, but you will soon see how it all fits together.
I had been living in Puerto Vallarta for several years and thought I was doing a pretty good job understanding the culture. Then a casual statement by a well-traveled lady looking at real estate that afternoon caught my attention. She said that when residents of Mexico go to the U.S., they sometimes get a case of “tourista,” or upset stomach.
This may seem like a strange example to open an article about real estate in Mexico, but I still remember when the “light bulb” came on after hearing the lady’s remark. We don’t have unique experiences living in Mexico. Foreigners in all countries have similar issues.
We can take that anecdote and apply it to purchasing property in Mexico to illustrate how the main hurdles generally are the same:
1. Currency Issues. We realize when traveling that fluctuating currency exchange rates affect the cost of the trip. A more expensive item like real property magnifies the impact of the currency markets. Buyers from abroad can spend significantly less or more, for no other reason than the natural movement of the exchange rate.
In our market of the Bay of Banderas, the sales price of real estate can be in U.S. dollars or pesos, depending on what the buyer and seller desire. Closing costs through the notary are in pesos, whether it is capital gains for the seller or acquisition tax and fideicomiso trust cost for the buyer. Canadian dollars and Euros all are converted into U.S. dollars and/or Mexican pesos.
Tied to currency issues is the transfer of the money. How can funds be transferred and when does the rate change occur? Can the exchange rate be negotiated in advance?
2. Financing Issues. Obtaining a mortgage on Mexican property can be done through a Mexican or a U.S. lender. Previously, to save on the higher cost of these mortgages, over half of the foreign buyers paid cash. We will see more mortgages as their costs go down and cash is rare.
3. Tax Issues. The tax status of a foreign buyer can significantly affect the realized gain on a residential property and the net income on a rental or commercial property. In the U.S., as well as Mexico, taxes can be collected from the sales proceeds by the closing agent. An immigrant’s tax situation is largely determined by his status as a resident or nonresident.
4. Form of ownership will also affect tax outcome. Direct ownership by an individual may be the simplest and most effective solution in many cases. If the property is large and an investment to be developed and resold, then forming a corporate identity may be best.
5. Anyone, whether foreign born or native, should examine the tax considerations before initiating a real estate transaction.
6. Expert advice from a professional should be sought. It is interesting to note that U.S. property transactions to foreign entities require a U.S. tax identification number. Mexico is also requiring this.
Taking proactive steps with our clients and asking the right questions make it easier to clear the common hurdles for closing a transaction with a foreign buyer anywhere in the world.
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.